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Prime Time on the Euro

Last night’s Prime Time contained some interesting material.  A reader has provided a summary of some of  the main points, reproduced below:

Transcripts below of  remarkable comments by the ECB’s Executive Board
member, Lorenzo Bini-Smaghi, and  Fine Gael’s Leo Varadkar.

The stark contrast in the two viewpoints is a good summary of today’s
difficulties in Europe… Something has got to give, will give. And
probably in favour of the governments generally, not the ECB.

Leo Varadkar was asked on Prime Time what Ireland’s opposition Fine Gael
will be saying to the European Commission at their meeting today in
Brussels.

Leo Varadkar  – “They will be saying that Ireland does want to pay, that
we do want to take responsibility for our sovereign debt. They are going to
be saying that is a European problem, not just an Irish problem, that there
are flaws in the system in Europe. We are making it very clear to them,
which is very important, that at the current rate of 6%, we won’t be able
to pay. If they insist on this deal, on this interest rate, there will come
a point when Ireland won’t be able to honour its debts. And the money that
has been lent to us, we will be unable to pay, you know”.

Lorenzo Bini-Smaghi was interviewed by Prime Time –
“The amount of senior bonds is so small compared to the overall amount that
if you give a haircut to the bonds, immediately you would have a run on the
banks, by the Irish themselves by the way, because they would not trust
anymore their liabilities, their assets held in the banks are safe. So you
would have immediately a run on the bank, a collapse of the banking system
so the banks would not lend anymore to corporations. They would have to
restructure their own liabilities with the Irish citizens. So the Irish
people in the end would pay, pay for it, in the same way as the Americans
paid for the collapse of Lehman”.
“The government engages a country when it signs a agreement. .. The
programme is there has been signed and has to be implemented”

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Debt Repayment and Ceausescu

Arthur Beesley has an interesting article in today’s Irish Times which reports on the views of Nouriel Roubini and Ken Rogoff in relation to Ireland’s debt situation.  One element in the article is a passing reference by  Rogoff to Romania’s determination to pay off its external debt under the Ceausescu regime.

Readers may interested in more details on this case.

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The IMF on Eurozone Policy

Attached are the four conclusions of the IMF’s Financial Stability Update just released, in so far as they concern the Eurozone, with my comments:

‘In the European Union, the steps listed below are needed to reduce uncertainty and help restore confidence in markets.

  • Further rigorous and credible bank stress testing is required along with time-bound follow-up plans for recapitalization and restructuring of viable, undercapitalized institutions and closure of nonviable ones.’

Comment: The IMF is suggesting new stress tests and ‘follow-up’ recapitalisation and re-structuring of banks. In that order, not in the reverse order.

  • ‘The effective size of the European Financial Stability Facility should be increased and it should have a more flexible mandate. For countries where the banking system represents a large proportion of the economy, it is now even more essential to ensure access to sufficient funds, going beyond national backstops whenever necessary.’

Comment: Means the EFSF is inadequate in size and function, particularly for countries with large banking systems, such as Ireland. 

  • ‘Euro area-wide resolution mechanisms need to be deployed and strengthened as needed. The introduction of a pan-European bank resolution framework with an EU-wide fiscal backstop would help decouple sovereign and banking risks.’

Comment: Means the IMF wants to share bank losses with bank creditors and re-capitalise banks with EU-wide, and not just national, fiscal support. 

  • ‘The European Central Bank will need to continue to supply liquidity to banks that need it and keep its Securities Markets Program active, while also recognizing that this is a temporary set of measures and will not solve the underlying problems.’

Comment: Means that ECB has been overly restrictive on both counts.

Does anyone still believe that the IMF was happy with the design of the Irish bail-out?

Denis Conniffe, RIP

For those who haven’t heard the sad news, Denis died on January 20. He worked for many years in the ESRI and then, in his ‘retirement’, in NUI Maynooth and UCD. He was a brilliant statistician and a real giant of the Irish Economics world. He was always generous in sharing his knowledge with colleagues, particularly the PhD students with whom he worked. He was also encyclopaedic on local and military history, and an avid hill-walker. He will be greatly missed.

Buiter Vs. Krugman on European Rigidities

This is really just a sub-thread on Greg’s Krugman post and Kevin’s earlier Buiter post.   

A significant part of Paul Krugman’s case against the Euro relates to the resulting loss of macro flexibility.   As he explains, nominal exchange rate devaluations/depreciations are effective in lowering the real exchange in an economy with substantial nominal rigidities.   However, Willem Buiter and co-authors argue that European countries tend to display real rigidity rather than nominal rigidity, making changes in the nominal exchange less effective in producing improvements in cost competitiveness.   Interestingly, however, Buiter holds out Ireland as a possible exception to the European pattern.    

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